Mexico Reverses Its Position on Crude Oil Output

Energy: Country that backed production cuts now urges boost as prices reach 9-year highs. Clinton prepared to release reserves.

MEXICO CITY — Growing concern over soaring oil prices prompted Mexico on Tuesday to urge a boost in world production, and President Clinton said he is prepared to release crude oil from the nation's strategic reserves.

"I have not closed off any options. I'm monitoring this on a daily basis. It's a deeply troubling thing," Clinton told reporters in Washington.

U.S. crude oil futures on Tuesday briefly hit a nine-year high of $30.45 a barrel, but eased to close at $30.06 after Clinton's remarks.

The government of Mexico, a major oil exporter that helped engineer the sustained oil price rise over the last two years, declared that current prices could damage the world economy and backfire on oil-producing nations.

Mexico has become a major strategic player in global oil strategies, and its change in position is seen as an important development as industrialized nations voice increasing concern about the price of oil.

Energy Minister Luis Tellez noted that benchmark oil prices have reached the highest level since the 1991 Gulf War and are triple the $10 level of less than two years ago.

"In my opinion, this is too high a price," Tellez said.

Tellez said he will call for global oil production hikes to replenish stocks when he meets March 2 with oil ministers from other key oil producers, including the Organization of Petroleum Exporting Countries.

OPEC itself next meets March 27, four days before its current production quotas are to expire.

The crude oil price surge has pushed retail heating oil prices above $2 per gallon, roughly double the year-ago price, and gasoline prices to an average $1.356 a gallon nationwide, the highest since Iraq invaded Kuwait in 1990, according to U.S. government data.

This has raised political pressure on the Clinton administration to act. It has also raised fears of inflationary pressures that could derail the nation's economic boom, although the economy has so far absorbed the sharp oil hikes with little apparent damage.

Mexico, the world's eighth-largest oil producer, is not a member of OPEC and in the past avoided becoming entangled in the cartel's decisions.

That changed dramatically in March 1998. With oil prices plunging below $10 a barrel, Mexico initiated accords on production cuts with OPEC members Saudi Arabia and Venezuela and non-OPEC nations such as Norway.

For the first time since OPEC's heyday in the 1970s, the production quotas have proved highly effective. Oil prices have risen steadily as has Mexico's stature in world oil markets.

Tellez's comments came in advance of a Saturday visit by U.S. Energy Secretary Bill Richardson, who is certain to encourage Mexico to increase crude oil output.

Richardson then goes to the Middle East to speak with OPEC leaders Saudi Arabia and Kuwait, then holds sessions with the oil ministers of Norway and Venezuela.

White House officials indicated that any decision to tap the underground Strategic Petroleum Reserves in Texas and Louisiana would probably await the outcome of those talks.

Mexico's concern about oil prices going too high reflects changes in its own economy that have made it far less dependent on oil exports than it used to be, and more dependent on the economic health of its trading partners.

Tellez noted that European leaders also have expressed anguish in recent days about steep oil prices, raising fears of inflation and interest rate hikes that could slow economic growth, "which in turn could have an impact on demand for Mexican exports."

Furthermore, Tellez noted, countries such as the United States and Japan have nearly 1 billion barrels of strategic reserves.

that could be sold into the markets with unpredictable results.

All these factors argue in favor of working toward price stability, Tellez said.

"I believe that Mexico has to act with prudence, with responsibility, to maintain stability and adequate prices that don't affect the development and growth of the global economy."

George Baker, a Houston-based energy analyst who publishes the Mexico Energy Intelligence newsletter, said it is surprising that the first words from an oil-producing country ahead of the critical round of output talks came from a non-OPEC nation that is a relatively small factor in the market.

"Through some alchemy of Tellez, Mexico has come to have a role that even two years ago it never dreamed of having," Baker said.

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Oil Skid

U.S. inventories of crude oil have declined the last two years as exporting nations have trimmed production. Monthly U.S. crude oil inventories and latest, excluding strategic reserves, in millions of barrels: